Mr Osborne's small plan for big infrastructure

Cranes at a construction site Will the new plan unlock investment?

It's hard to find an economist or pundit who does not want to see more public infrastructure investment in Britain to support the economy. Today the chancellor and the chief secretary are telling us they finally have a plan to make it happen.

They are so keen to get new infrastructure projects up and running, they say they're using the government's "hard won fiscal credibility" to make it happen. What they will not say is that they are spending any new money.

There's a new guarantees scheme to help unlock up to £40bn worth of priority infrastructure projects, the first of which could be awarded in the autumn.

There's also a new one-year, temporary programme to allow departments to lend money to smaller public-private infrastructure projects that might otherwise get delayed.

Finally, there's a £5bn export refinancing facility to help insure UK companies against the cost of certain big ticket foreign orders falling through. (Though that piece won't be up and running until the end of the year.)

The big questions are: what is it all going to cost? And how much difference is it going to make?

The official answer to the first question is it won't really cost anything - or at least, nothing that will formally count as new spending or new debt. Perhaps that should come as no surprise. After all, any thing that did cost the government upfront would immediately be labelled a "Plan B".

The temporary lending scheme is coming out of departments' own budgets. That, incidentally, has some doubting whether the investments will happen, since many of the relevant departments are already short of cash.

The guarantees will all be "off balance sheet", like the investments carried out under the Private Finance Initiative (PFI). In other words, the cost will only show up in government spending, when and if the government actually has to hand over any cash.

Mention of the PFI may well make some of you nervous. That was another wheeze dreamed up, years ago, to "unlock" a lot of new infrastructure projects, without the government having to take on the upfront costs.

In opposition, Mr Osborne criticised the way that PFI had been used simply to keep big projects off the government's balance sheet. The scheme had ended up costing taxpayers far too much, while private contractors had been offered a one-way bet.

But anyone who thinks the government is about to make the same mistake with these infrastructure guarantees can probably relax.

Read the details of today's guarantee scheme, and you see it has been written by an organisation determined not to take on one jot of unnecessary risk - and equally determined that private sector contractors not get a penny more than they need, even if the pennies in question are not going to show up in the public accounts.

Put it another way, it is a scheme that has been written by and for the UK Treasury.

It is unlikely to go down as another costly infrastructure fiasco. But it's possible it won't result in an enormous amount of new infrastructure either.

Here's a flavour of what I'm talking about. To qualify for consideration in this scheme, the Treasury says an infrastructure project has to be:

  • "Nationally significant, as identified in the Government's National Infrastructure Plan 2011
  • "Ready to start construction within 12 months (i.e. with all necessary planning etc consents)
  • "Financially credible, with equity finance committed and project sponsors willing to accept appropriate restructuring of the project to limit any risk to the taxpayer
  • "Good value to the taxpayer, assessed by HM Treasury to have acceptable credit quality, not present unacceptable fiscal or economic risks and to make a positive impact on economic growth."

All of that might sound reasonable. Prudent, even. But there is one further test, which some will find a bit over the top.

As well as jumping through all these hoops, to qualify for the partial guarantee (which will be tailor-made for each project) the backers must also be able to demonstrate that they definitely would not be able to go ahead without this carefully delineated government support.

In other words, it has to be a perfect project in every possible respect, but somehow not quite perfect enough to get up and running entirely on its own.

These are difficult times. There may well be projects that fall into this category. The Treasury itself says that up to £40bn worth could possibly qualify. But that is a maximum, spread over many years. And they have to pass all these tests first.

In today's tough environment, some will say if a project is that important, it's worth getting it up and running quickly, even if that does mean you end up giving more help than is strictly necessary. Put it another way, it might be worth incurring what economists would call some "deadweight loss" to make them happen. But that is not an argument that carries much weight at HM Treasury.

In its own national infrastructure plan last November, the government identified a pipeline of critical infrastructure projects worth £250bn.

Dieter Helm, a respected expert who has advised the government on this, says the true figure is closer to £500bn.

It would be nice to think there is a "free lunch" available here - a cost-free way for the government to lend its good standing in the financial markets to worthy private projects, to make it easier for them to raise the money they need.

That is why most economists thought this kind of scheme was worth exploring. There is now a massive gap between the government's current cost of borrowing and the cost for anyone else.

But, looking at the very careful way the guarantees have been designed, you have to wonder how much investment it will really unlock.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • Comment number 303.

    All this user's posts have been removed.Why?

  • Comment number 302.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 301.

    re#296 It is relevant in US as I discovered while doing some more research. US home loan mkt to extent in past has been preserve of Savings&Loan Banks, so not LIBOR affected.

    EXCEPT, it appears, when big banks moved in to US h/loan mkt AND created derivatives on back of sub-primes, they tied THEIR rates to LIBOR.

    So, big question is: could/did LIBOR manips have an effect in 2007 crisis?

  • rate this

    Comment number 300.

    @295 Correction to my first post: S/b mortgagors not mortgagees.

    As far as law suit concerned, who gets sued? Is it traders? Market supervisor? BBA? Individual LIBOR banks? FSA? Or BoE as ultimate financial regulator?

    And should mortgagors be made to pay more to banks for having had lower interest rates? What if their bank not a LIBOR bank?

    See the scope of problem now?

  • rate this

    Comment number 299.

    If you took time to discover what LIBOR is John, & stopped wittering about things being offered, you will realise that in secondary market that was manipulated in '05, over time it was happening, it MAY have completely evened out.

    Anyway, as far as I know, Pension Funds & savers tend not use the secondary markets.

  • rate this

    Comment number 298.

    No I have not. All I have done is point out the inaccuracies of your posts. The Police are investigating the 2005 traders. For a class action to succeed it will help to have convictions there. Secondly, a loss needs to be established: in the UK there may be no loss on which to sue from 2005.

  • rate this

    Comment number 297.

    In the UK we do not actually know whether savers or mortgagees suffered loss or enjoyed gain as far as 2005 LIBOR is concerned. Mortgagees, in theory, benefitted from a lower LIBOR in 2009 except, as I have posted & you are wilfully ignorant of, most UK mortgages are tied to Base Rate.

  • Comment number 296.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 295.

    293. U2s "Who says I hate British savers and Pension Funds? "

    You have consistently derided my suggestion of a class action to help savers and pension funds. By taking that position you are against savers and pension funds. So I have every right to say that you hate savers and pension funds.

    Secondary market - won't the derivatives market balance out? Some banks will win & others lose.

  • rate this

    Comment number 294.

    It may stimulate some investment but probably not a lot.
    All the Government has to do is to tell Corporate UK to invest their £750 billion which they're sitting on or else they will tax it at 99.9%.
    Problem solved.
    Then initiate a one-off weath tax on positive net assets on over £500k. This would pay off the National Debt.
    Another problem solved.
    Think radical outside the box!

  • rate this

    Comment number 293.

    Who says I hate British savers and Pension Funds? Where do you get this nonsense from?

    I agree there is a case to answer in the UK; when have I said not?

    I would like the whole secondary market investigated.

  • rate this

    Comment number 292.

    283 Toby Chambers
    "The real problem is government crowding out investment."

    There's lots of evidence directly contradicting this. The problem is a lack of investment opportunities due to a lack of demand/growth. Gilts don't crowd out investment anyway, as the money spent just pools back into private balance sheets ready to be re-invested again.

  • rate this

    Comment number 291.

    Different countries use LIBOR for different things, as an international inter-bank rate it may vary from central bank rates.

    In UK, Base Rate is commonly used for mortgages although that is changing as providers have started to tie some types to LIBOR.

    In US, mortgages were tied to LIBOR and one big question is what effect LIBOR manipulation had on the sub-prime crisis.

  • Comment number 290.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 289.

    287 Up2snuff
    "mortgages in the US were tied to LIBOR.That is not necessarily the case in the UK and elsewhere"

    You have no idea what you are talking about. But please keep going it is fun.

  • rate this

    Comment number 288.


    Why do you hate British savers and pension funds?

    Why do you find it impossible to understand that there is a case to argue that the rigging of LIBOR damaged British people?

    Many commercial loans and deposits all round the World are pegged to LIBOR.

    But it is not just LIBOR that matters it is the consequence of rigging LIBOR that matters and the policy of turning a blind eye.

  • rate this

    Comment number 287.

    I think if you bother to check you will find that mortgages in the US were tied to LIBOR.

    That is not necessarily the case in the UK and elsewhere.

  • rate this

    Comment number 286.

    Uncomfortably Numb

    This coalition has only existed for two years. It needs more time to clean up the mess

    The trouble is that while the coalition are keen to point at the mess (of the last 30 years) and laugh, after 2 years they still won't look at that mess with a view to sorting it out.

    They have had plenty of time to get investigations running, but don't have the will.

  • rate this

    Comment number 285.

    Class Actions & the LIBOR Fraud

    In the USA class actions are building.

    The UK we has been very badly hit by regulator incompetence (best interpretation) of wilful fraud. There are 3 of them, but overall is the State.

    So the State is liable for the loss that savers and pension funds have suffered by virtue of nugatory interest rates maintained by the LIBOR fraud.

    So cough up George!

  • rate this

    Comment number 284.

    If no one has a vision of where we want or should be in say 20-25 years in terms of structure & outcomes then there is no long term planning & without high quality long term planning the UK will continue to drift rudderless while the UK gets ripped off by the money men & foreign exploitation. If govt is oblivious to where we want to be then we can never get there & UK stays in the 'Liabor mess'


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